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Background of ASIC v. Adler (2002) Case

Discuss about the Australian Securities and Investments Commission versus Adler.

Boards have a fundamental duty to make sure they have sustainable developments in company estimations. They do this by giving planned guidance and supervision concerning their resolutions in management, as well as choosing and replacing the management staff when needed (Adams, 2011, p.40). The boards can only achieve success if they implement the governance principles in what they do and to make sure that the business follows those ideologies in making critical choices. The Australian case ASIC v Adler clearly reminds that enterprises and directors are obliged to guarantee an efficient corporate governance framework that safeguards corporations against inappropriate engagements by the directors (Nguyen & Boubaker, 2014). Besides, the procedure should involve enough balances to guarantee a system that gets not bypassed in an easy way (Venus, 2016, p.29). This report provides the background of the Australian case, ASIC v. Adler, the breached duties and responsibilities according to the Corporations Act and the Court’s decision in the case.

The primary defendants in ASIC v. Adler case were Rodney Adler, Ray Williams, and Dominic Fodera. Adler was HIH’s non-executive director, its substantial shareholder, and an officer of HIHC. Williams, on the other hand, was the Chief Executive Officer, as well as the founder of HIH. Lastly, Fodera was HIH’s Chief Financial Officer and director.  

In mid-2000, a subsidiary of HIH called HIH Casualty and General Insurance Company Limited (HIHC) offered a loan of 10 million dollars to a company led by Adler Corporation, known as the Pacific Eagle Equity (PEE). This company had only one director who was Adler, and only two shareholders – Adler and his wife. This loan provision got made by the director and CFO of HIH, Dominic Fodera. Unfortunately, the credit was found to be unsecured and undocumented, and worst of all, Fodera made this transfer without the consent of the other HIH directors (Segalla, n.d.). Adler’s PEE Company turned into a representative of the Australian Equities Unit Trust (AEUT). Following the 10 million dollar credit, AEUT issued units of the same amount to the subsidiary of the HIH Company, HIHC. Nonetheless, PEE managed a value of trust worth less that the loan amount. By use of a trust mechanism, PEE employed the credit in the following three types of investments:

It used circa 4 million dollars of the loan to acquire shares of HIH on the stock market. Adler wanted to generate a deceitful imprint to the market that he was assisting HIH because the company had falling stocks. His intention was to make the HIH investors think that the firm was doing well despite its falling shares. He was doing this while looking forward to raising the share price or stop it from intensely reducing. Shortly after, the company sold the HIH shares at a loss of 2 million dollars.

Breached Duties/Responsibilities and the Reasons for their Breach

It also used approximately $ 4 million of the loan to buy unlisted shares from Adler Corporation. However, Adler ended up getting a total loss on them.

It used about 2 million dollars to lend Adler. Unfortunately, there was no sufficient documentation for this transaction, making it an unsecured loan as well.

All these operations happened without the knowledge of the investment committee and the board or the stakeholder’s authorization. Aside from that, the credit got given without proper documentation and confidence so that the HIH directors may not know about it. However, at the end of it all, HIH collapsed (, n.d.).

In the ASIC v. Adler case, Adler breached the duties assigned to him as a director of the HIH and HIHC when he made transactions. It became clear from the court that he contravened responsibilities of the director under Corporations Act 2001 section 180, 181, 182, 183 and 260A (Adler on Appeal' 2004, p.67). Section 180 talks about responsibility to operate with care and diligence. 181, on the other hand, is the responsibility to act in an honest manner for a good reason. 182 talks about how to use position in the correct way, 183 is about duties to use information in the correct way, and 260A prohibits Corporations from lending loans to an employee.(Tills, M, & Wills, C 2016, p. 625).

ASIC says that this part of the Corporations Act directs the company's director to practice their powers and discharge the duties under them with care and diligence (Campbell, 2016, p.530). Further, it states that the directors are employees just like the rest of the employees, but are responsible for the company management in daily basis. (Varzaly, 2015, p.311). In this case, Williams failed to ensure loan protection before it got awarded to PEE, thus contravened section 180(1) of the Corporation Act. Fodera violated this section by failing to discuss the suggestion of giving out 10 million dollars financial assistance to PEE with the company’s investment committee and the boards. Therefore Williams and Fodera failed to perform their duties as required and did not bother to inform HIH board about their intention. Otherwise, ASIC purported that section 180 (2) safeguards directors who make a business judgment rule under common regulation, statutory or equal responsibilities with care and conscientiousness in a transparent manner. This rule safeguards directors by defending them on the risks they take especially in entrepreneurship, which can result in company loss or profit (Campbell, 2016, p.532).

Section 180: Duty to Act with Care and Diligence

This part of the Corporation Act says that the judgment should be in good faith with a clear goal. The directors should not have any personal interest. They should inform their colleagues about the subject matter of the judgment and be able to convince them that it was in the best interest of the entire company. Business judgment rule give protection to the officers from any personal liability as long as their judgment is not for personal gain but for the best interest of the corporation (, n.d.). In entrepreneurship, the directors are allowed to make such judgment as they are familiar with the specific laws that safeguard them when they can act in an honestly manner (Teele Langford & Ramsay, 2015, p.180). Another defense rule is when the liability uncertainties in the business judgment get removed by the use of the statutory duty of care and by providing shareholders’ interest by engaging them in risk taking activities such as entrepreneurship. If the directors can follow conditions under this section, then they will have personal liability protection. Adler breached section 181 (1) by acting in bad faith through exercising his powers and discharging responsibilities for his own interest instead of that of the company.

Section 182 of the Corporation Act restricts the company’s staff members from misusing their power to achieve self-satisfaction or to satisfy other people instead of the corporation. In the ASIC v. Adler case, the court stand was that Adler broke section 182 because of making disbursement deal of 10 million dollars from HIHC to PEE that was intended to buy HIH shares on the stock market. As a result, PEE got an investment loss by reselling HIH shares. The court viewed this transaction as fraudulent as it held that Adler inappropriately used his position to gain advantage for his company (, n.d.). Williams also, misused his position to authorize the $10 million payment without the approval of the investment board. He was supposed to disclose any transaction to the investment board before authorizing in accordance to the guidelines of the HIH investment.

This section affirms that an officer must not improperly use the information he or she gained to advantage himself or other people or disadvantage the corporation. For example, the executive should not use the knowledge he has gained as a result of having contact with the stockbroker to buy the shares for personal gain to the disadvantage of the corporation (Pey-Woan, 2006, p.7).  In this case, Adler contravened section 183 by trying to use the knowledge he had about the stock market to help Adler Corporation instead of HIHC.

Section 181: Statutory Duty to Act in Good Faith and For a Proper Purpose

Section 260A of the Corporation Act prohibits any company from providing financial assistance to an individual to obtain its shares (International Monetary, 2012). It is because this will cause real prejudice in the stock market. In this case, it is evident that Adler contravened section 260A by assisting PEE financially through HIHC.

The reason why Adler breached various Corporation Acts is that he knew that the loan got given without the proper documentation. Because of the improper documentation, he was aware that this business deal could not bring the attention of other HIH directors. On the other hand, the transactions were done secretly without the knowledge of the shareholders' approval or the board. Moreover, HIH's investors were also not informed. Because of this, Adler knew that other directors were not to realize what happened and, therefore he thought he was safe.

The Court with His Honour Justice Santow further decided that Adler will stop working as a director in any corporation for 20 years. Aside from that, Judge Santow also agreed that Williams, the other defendant director will not function as a director for any company for ten years. Besides banning the two directors, he imposed different penalties on the accused. Adler, Adler Corporation, Williams and Fodera got fines of $450,000, $450,000, $250,000 and $5,000 respectively. In addition to that, Adler, Adler's Corporation, and Williams got forced to recompense HIHC a total of $7,986,402 for the damages caused ('Ex-HIH bosses, 2005, p.8).

Following the imposed penalties, the Court with His Honour Justice Santow made the decision because of the business judgment rule and the arm’s length provision. According to Santow, Adler would have done a business decision first before taking action (Teele Langford & Ramsay, 2015, p.173). Based on this rule, Santow realized that Adler had a personal interest in his doings (Segalla, n.d.). Just like the case of the other two directors, the business judgment rule did not apply for Adler. Adler did not do the business in good faith; Williams did not make a business judgment, and in some instances, he did not do the business in good faith, and Fodera did not make any business judgment.

Based on the arm’s length exception, Santow found out that it was not reasonable to buy shares from the parent company using its wholly owned subsidiary (Smith, 2016).  Worst of all, it was a purchase without legal documentation. Additionally, Santow found that the trust deed was not enough to protect the company’s interests and if money got transferred to trust, HIH could not by any way dictate how it got spent. Clearly, there were no proper safeguards in the transactions.

Section 182: Improper Use of the Position

The financial aid of 10 million dollars for PEE to buy stocks from HIH was an illegal move (, n.d.). Besides, the subscribed unit trust was not equal to the original amount of the provided loan – it was worth less. As a corollary, this move was discriminatory to HIH, HIHC and the shareholders (Segalla, n.d.). As such, the people involved in the action breached Section 260A of the Corporations Act aside from contravening sections 180, 181, 182 and 183.


To conclude with, it is evident that HIH failed because of its poor corporate governance. Companies must always ensure they have good corporate governance because it is a critical character for any corporation (Adams, 2016, 357). With it, a company can build faith and assurance from its members including the company’s directors, shareholders, and the other pertinent parties. Other than that, it increases the value of the company and sustains its growth. In case a company does not comply with the Corporation Laws, then it breaches the sections under the Act. Furthermore, duties of directors are vital in any business. Directors should not fail because of the influence from their seniors. They must always remain faithful and perform their standards of duty. In summary, directors should fully disclose their interests, ensure they act at arm’s length, ensure they avoid conflicts, and finally, abide by the company’s reporting structure (Adams, 2011, p.34).

Reference List

Adams, MA 2016, 'Contemporary case studies in corporate governance failures,' Governance Directions, 68, 6, pp. 335-338.

Adams, M 2011, 'Latest Developments in Officers' Duties of SMEs,' Journal Of Business Systems, Governance & Ethics, 6, 3, pp. 31-42.

Campbell, T 2016, 'The obligations and risks imposed on directors by workplace laws,' Governance Directions, 68, 9, pp. 530-533.

'Ex-HIH bosses sentenced to prison' 2005, Reactions, 25, 5, p. 8.

International Monetary, F 2012, Current Developments In Monetary And Financial Law, Washington, D.C.: International Monetary Fund, eBook Collection (EBSCOhost). (n.d.). Case Summary ASIC v Adler | Law Teacher. [online] Available at: [Accessed 5 Jan. 2017]. (n.d.). Contraventions of ASIC v Adler | Law Teacher. [online] Available at: [Accessed 5 Jan. 2017].

Nguyen, D, & Boubaker, S 2014, Corporate Governance And Corporate Social Responsibility: Emerging Markets Focus, New Jersey: World Scientific, eBook Collection (EBSCOhost).

Pey-Woan, L 2006, 'Regulating Directors' Duties with Civil Penalties: Taking a Leaf from Australia's Book,' Common Law World Review, 35, 1, pp. 1-23.

Segalla, S. (n.d.). Checklist for directors' duties. [online] Available at: [Accessed 5 Jan. 2017].

Smith, C 2016, 'Company directors who cannot read or understand English warned by Australian court,' Governance Directions, 68, 9, pp. 540-543.

Teele Langford, R, & Ramsay, I 2015, 'Directors' Duty to Act in the Interests of the Company: Subjective or Objective?', Journal Of Business Law, 2, pp. 173-182.

'The Duties of Directors - Adler on Appeal' 2004, Australian Business Law Review, 32, 1, pp. 66-69.

Tills, M, & Wills, C 2016, 'Directors found guilty of breaching duties following corporation's breaches,' Governance Directions, 68, 10, pp. 624-626.

Varzaly, J 2015, 'The Enforcement of Directors' Duties in Australia: An Empirical Analysis,' European Business Organization Law Review, 16, 2, pp. 281-319.

Venus, P 2016, 'How to avoid disqualification as a director by ASIC', Governance Directions, 68, 1, pp. 28-31.

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